DBRS Downgrades BPVI to BB (low); Places Ratings Under Review Negative

DBRS Ratings Limited (DBRS) has today downgraded Banca Popolare di Vicenza Scpa’s (BPVI or the Bank) Senior Long-Term Debt & Deposit Rating to BB (low) from BB and confirmed its Short-Term Debt & Deposit Rating at R-4. Concurrently, the Bank’s ratings were placed Under Review with Negative Implications (URN). In parallel, the Bank’s Intrinsic Assessment (IA) was downgraded to BB (low) from BB, while the support assessment was confirmed at SA3.

Today’s downgrade follows the publication of BPVI’s 2015 results, when the Bank reported a EUR 1.4 billion loss, and takes into consideration the deterioration in the Bank’s franchise, funding position and liquidity buffer. The ratings have been placed URN to reflect BPVI’s increased liquidity risk, as well as execution risks for the Bank’s pending capital plans.

A successful public listing and capital increase in April, together with an improvement in BPVI’s funding and liquidity positions, could contribute to a more supportive view of the ratings. On the other hand, any delay in the execution of the Bank’s capital plan or further deterioration in BPVI’s franchise or liquidity position, could contribute to negative rating pressure.

BPVI has been under increasing pressure over the past 12 months. BPVI’s reputation suffered in September 2015 following the Bank’s 1H 2015 results which revealed a meaningful deterioration in BPVI’s capital position and risk profile. Investor confidence worsened during autumn 2015 as the Bank’s former management team came under investigation by the Italian Public Prosecutor Office. And market concerns for the Italian banking sector affected BPVI in November with the application of resolution tools to four small Italian banks.

BPVI’s refinancing risk has escalated and has been reflected in higher market spreads for both senior and subordinated bank debt. This funding pressure has also affected the Bank’s core retail base. In 2H 2015, BPVI’s total funding (net of repos) decreased by EUR 5.1 billion to EUR 21.9 billion at December 2015. This represented a 19% decrease compared to 1H 2015, (down 23% year-on-year (YoY)), and was mainly due to deposit outflows from corporate and retail customers. Due to the outflows, the Bank’s Liquidity Coverage ratio (LCR) deteriorated to 47.5% at year-end (YE) 2015 from 91.8% in June 2015 and 95.3% at YE 2014. Recourse to the European Central Bank’s (ECB) short term funding facilities, as well as securitisations with institutional counterparties, helped the Bank address its liquidity needs.

DBRS notes that BPVI’ funding pressure eased at the beginning of 2016. The Bank’s stock of deposits has somewhat stabilized in January 2016, while the LCR improved to 80%, according to management’s indications. However, the Bank’s residual liquidity buffer remains vulnerable should the Bank face additional stress.

BPVI plans to issue additional equity of EUR 1.5 billion as part of its public listing, targeted for April 2016, and has secured a pre-underwriting agreement with UniCredit Group. The Bank’s capital plan, together with BPVI’s legal transformation into joint-stock company, will be subject to EGM’s approval on March 05, 2016. In DBRS’ view, the approval would represent a step forward in the Bank’s capital strengthening and restructuring process. However, further progress towards an IPO and capital raise will depend also on market conditions, including investor appetite and market volatility.

DBRS will monitor the Bank’s progress towards capital and liquidity during the review period which is expected to be resolved by May 2016. Completion of the capital plan is needed for BPVI to be compliant with the ECB’s minimum capital requirement. At YE 2015, BPVI reported a Common Equity Tier 1 (CET1) ratio of 6.65%, which is well below the 10.25% minimum set by the ECB under the SREP process in November 2015.

The extent of the deterioration in BPVI’s financial position emerged following an ECB investigation, as well as the due-diligence carried out by the new management team on the Bank’s capital position and risk profile. The investigations revealed a number of cases in which BPVI’s clients used loans granted by the bank to buy its shares. Such loans contributed to inflate the Bank’s capital position by EUR 1,139 million. As a consequence, the Bank has reported EUR 819 million in write-offs and provisions for risks, as well as a capital filter for EUR 321 million at YE 2015. This led to a net loss of EUR 1,407 million for full-year (FY) 2015 (compared to a net loss of EUR 759 million at YE 2014), and a CET1 ratio of 6.65% (10.44% at YE 2014). Among other things, BPVI’s loss for FY 2015 included an increase in credit provisions, impairment on goodwill, as well as write-offs and provisions for market activities and litigations risks.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (December 2015). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (December 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include Company’s reports and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

This rating is under review. Generally, the conditions that lead to the assignment of reviews are resolved within a 90 day period. DBRS reviews and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Nicola De Caro
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: December 18, 2013
Most Recent Rating Update: September 2, 2015

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